Editor's Note: Dan Greenberg is a lawyer and former state representative. He recently founded the Advance Arkansas Institute, a nonprofit group that provides commentary on public policy. Dan graciously agreed to let us reprint a portion of this article, which you can find in full at the Advance Arkansas website.

How to Cut Taxes in Arkansas: Basic Principles of Tax Policy
By Dan Greenberg

Because of the 2010 elections, fiscal conservatives hold a stronger hand in our state legislature. Many legislators have filed bills to reduce Arkansas’s tax burden, but enacting them all would be impossible. Any tax reduction deserves some praise, but legislators should note that some tax cuts are better than others. Writing second-rate tax relief into law will threaten the passage of first-rate tax policy. Legislators should keep the principles of tax policy in mind, because every one of those principles – if established in law – will increase revenue. Among the principles that an ideal tax system encourages and embodies are:

• Simplicity. Taxes should be easy to administer and comply with, in order to encourage voluntary compliance and discourage tax shelters and disguised income.
• Transparency. Taxes should be obvious and apparent: they shouldn’t be hidden from consumers by being lumped in with the price of the purchased good.
• Neutrality. The tax code should not micromanage the economy, encourage people to make decisions for tax reasons, or otherwise distort price signals that affect individual choice.
• Stability. Constant changes in the tax code make planning and investment difficult.
• Economic growth and prosperity. A broad-based, low-rate tax best encourages job creation, capital investment, and economic growth.

These values may seem abstract. However, their importance becomes more apparent when they are used to rank the tax proposals of the 88th General Assembly.

If the goal of tax policy is to create a thriving economy that attracts investment and jobs to the state, the most preferable tax relief is broad-based reductions in income taxes (HB 1387), capital gains taxes (HB 1002), and/or industry taxes on utility consumption (SB 269). Such tax relief will lead to capital investment, job creation, and a prosperous state economy. If the Arkansas tax code treats capital investment more favorably by lowering the cost of doing business here, Arkansas will succeed in attracting investments and businesses that create jobs when it lowers income taxes. The double taxation that Arkansas manufacturers face – because of our state’s extra layer of energy taxes – makes utility tax relief another priority for advocates of economic growth and job creation. (With respect to economic development, any of these three tax measures is far superior to Arkansas’s current policy of trying to attract new businesses into the state with an array of special tax breaks and subsidies. Such favoritism is demoralizing and insulting to other businesses in Arkansas; it could encourage them to leave the state to see if they can get a better deal elsewhere.)

To read the full article, click here.